Mid Quarter Convention

[oceanlovin'ea]

I guess I have this question because my software keeps asking me a question. So I am just trying to confirm what I did.

TP has schedule C. Bought some new things last year....computer, monitor, desk, lateral file cabinet, table, light fixture. Over 40% was placed in service in last quarter of the year. This means that I have to use mid quarter for all items placed in service during the year. Is that correct?
Can I choose to elect Section 179 for any of the properties? Do you have to elect section 179 for all 5 year property?
Or do you have to do regular depreciation because of the MQ convention?

I looked at Pub 946 and the instructions for 4562 and in the TTB, but can't find a definitive answer.

Thanks

Linda, EA

[TAX4US]

I have used the 179 exp to get the total for dep items away from the 40% rule. The 179 exp as I recall is avaiable on each item, but if you get caught in the 40% rule all items must be in that 40% depending upon when placed in service. Maybe someone else will chime in. I can only learn more.

[S T]

If 40% of the new assets are placed in service the last quarter of the year then you have to use mid quarter convention

To work around the mid quarter convention on new assets and 40% rule , you can choose which items to Section 179 to have less than 40% showing in the last quarter.
Here is an example

Section 179 Deduction

Under the Small Business Jobs Act of 2010 (SBJA), a taxpayer is entitled to immediately expense assets $500,000 of assets for 2010 and 2011.

Example
A taxpayer purchases $300,000 of seven-year property in May and subsequently purchases $300,000 of three-year property in November. Without making a Section 179 election, the taxpayer would be subject to the mid-quarter convention (40% x $600,000 = $240,000 and $300,000 is more than $240,000). However, in making the Section 179 election, the taxpayer may choose the property to apply the election. In this instance, to avoid application of the mid-quarter convention, the taxpayer should apply the 179 election to the later acquired property. Doing so reduces the cost of property acquired in the last quarter below 40% of the total costs of all property placed in service during the year (Property 2 - $200,000 - $133,000 = $67,000; 40% x $267,000 = $106,800).

Hope this helps

Sandy

[dtlee]

I agree with the above and also would note that if you are in a year where the Mid Quarter convention does not apply, you are allowed to likewise choose items for Section 179 Expensing in order to have more than 40% showing in the last quarter if you wanted to have the remaining items subject to the Mid Quarter convention rather than the Half Year convention.

[JohnH]

Since the original question has been answered, I'd like to pggyback a related question onto it. What's the general opinion on foregoing the Sec 179 deduction in part or entirely when the taxpayer's marginal rate is in the lower brackets?

I'm thinking specifically about the situation in which it can reasonably be expected that income is likely to be higher in future years and/or when taking a large depreciation deduction in the current year produces "phantom income" in future years on a financed asset.

I often hear tax preparers assert that it's always best to get the immediate deduction and I just wonder how much analytical thought this approach represents.

[dtlee]

Since the original question has been answered, I'd like to pggyback a related question onto it. What's the general opinion on foregoing the Sec 179 deduction in part or entirely when the taxpayer's marginal rate is in the lower brackets?

I'm thinking specifically about the situation in which it can reasonably be expected that income is likely to be higher in future years and/or when taking a large depreciation deduction in the current year produces "phantom income" in future years on a financed asset.

I often hear tax preparers assert that it's always best to get the immediate deduction and I just wonder how much analytical thought this approach represents.

i always have a discussion of whether the perceived tax benefit this year is needed to support the businesses continuation and whether or not the business is expected to grow significantly or peter out in future years before making such an election.

That is part of why I brought up the option of choosing assets such that the taxpayer is subject to the mid-quarter convention rather than always preferring the opposite approach. Since most of my returns are individual returns, most of the impact is on Schedule C. I have seen returns where the prior preparer choose to eliminate income so that the Schedule C is a loss against wages and other income only to have a much larger income and self-employment tax obligation in future years.

In one return, the asset had already been converted to personal use by the time the return was done, but the prior preparer had used Section 179 to expense it anyway.

[oceanlovin'ea]

choose not to use section 179

Even if the business is an s corporation, I sometimes choose to use regular depreciation rather than to use section 179. If income doesn't need to be lowered that significantly in the year property is placed in service, depreciation might be more valuable down the road. I sometimes use section 179 for less costly property but will use regular depreciation on more expensive ones.

I think we should look at each year and each piece of property on an individual basis and make a determination as to what will be best for the client.

Oh, thanks for the answer to my question. I think I know what to do now.
Linda, EA

[outwest]

Even if the business is an s corporation, I sometimes choose to use regular depreciation rather than to use section 179.
Linda, EA

I hope that you mean you discuss the options and recommend that the **client** choose regular depreciation instead of Section 179.....

[oceanlovin'ea]

yes, of course that is what I meant. But usually they say do whatever way is the best for me. But we do discuss it.

Linda, EA

[Gretel]

Another point to consider are loans associated with any asset before taking 179 or special depreciation. In a perfect world depreciation should not be "faster" than loan repayments.